Fiscal cliff or not, it's already rough for federal IT vendors

WASHINGTON - If Congress doesn't avert the fiscal impasse, automatic budget cuts could reduce federal IT spending by $66 billion in the fiscal year that began Oct. 1, according to an analysis by the industry group CompTIA.

As it stands, sequestration requires an across-the-board spending cut of 9.4% to defense spending, and 8.2% to non-defense spending. The U.S. spends about $80 billion annually on IT.

But vendors that work with the government are already being hurt. SRA International in Fairfax, Va., for instance, told investors recently that the uncertainty around future automatic spending cuts "is causing some clients to delay contract starts." The company said it has seen an increase in bid protests and delays in contract awards.

Mike Walsh, federal regional director of sales for Gigamon, a networking provider, says the turbulence in the federal market has been longstanding.

"The impact of sequestration and ongoing government negotiations over the budget has had a dramatic impact on the IT vendor community," said Walsh. This past year "was a rough year before sequestration talks even began."

Funding for big projects uncertain and full-year funding targets are in doubt because the government is operating under interim budgets, thanks to congressional gridlock.

With sequestration, the budget problems are compounded. CompTIA said its members, small and mid-sized tech firms, "stand to be significantly impacted."

If Congress doesn't reach an agreement, layoffs are expected. Analysts are keeping an eye on government Web sites where mass layoffs are posted under the Worker Adjustment and Retraining Notification (WARN) Act rules.

Among the largest IT related WARN notices so far was by SRA, which announced a layoff of 222 people on Jan. 1. But those layoffs, the company says, aren't related to sequestration, but the result of a lost Federal Deposit Insurance Corporation contract, which accounted for as much as 9% of revenue in one quarter.

There might be more WARN notices, if the White House allowed it. But it has told government contractors not to use the WARN system to warn Congress about the budget impact on their employees.

The WARN act requires employers with at least 100 employers to provide written notice to employees 60 days before layoffs. The threat of sequestration fears isn't a reason to provide layoff notice because of the uncertainty.

The White House also said sequestration-related WARN notices would "create unnecessary anxiety and uncertainty for workers."

The White House wrote that memo at the end of September. It is now less than two weeks to the New Year and uncertainty about Congress remains. Ray Bjorklund, vice president and chief knowledge officer at Deltek, a market research firm, believes federal agencies will continue with routine IT purchases post sequestration. But big program spending may be cut.

IT agencies are going to be careful in any case, because if they were to award a contract now and if sequestration happens, "that contract would probably have to be broken later in the year," said Bjorklund.

Sequestration may well slow down the ability of the government to keep up with projects that require some upfront investment, such as data center consolidation. The government has plans to close 962 data centers, out of 2,800, by 2015. A government data center, by definition, can be as small as large closet.

Sequestration-mandate cuts "slows down the ability to realize the savings, because of acquisition programs are not moving forward as smartly and swiftly as they would in a regular year," said Bjorklund.

Steve Charles, co-founder of ImmixGroup, which helps tech firms do business with the government, said the budget turmoil may help some tech firms that sell products, such desktop virtualization and cloud services, get contracts, especially if they can quickly deliver ROI.

"This very disruptive environment that we are in actually favors the disruptors," said Charles.

Patrick Thibodeau covers cloud computing and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov or subscribe to Patrick's RSS feed. His e-mail address is pthibodeau@computerworld.com.

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